Transportation logistics 2030 vol3

Volume 3: Emerging Markets – New hubs, new spokes, new industry leaders? Transportation & Logistics Transportation & Logistics 2030 Acknowledgements The editorial board of this issue of our Transportation & Logistics 2030 series consisted of the following individuals: PricewaterhouseCoopers EBS Business School Supply Chain Management Institute Klaus-Dieter Ruske Dr. Heiko von der Gracht +49 211 981 2877 +49 611 7102 2100 klaus-dieter.ruske@de.pwc.com heiko.vondergracht@ebs.edu Dr. Peter Kauschke Tobias Gnatzy +49 211 981 2167 +49 611 7102 2100 peter.kauschke@de.pwc.com tobias.gnatzy@ebs.edu Julia Reuter Prof. Dr. Inga-Lena Darkow +49 211 981 2095 +49 611 7102 2100 julia.reuter@de.pwc.com inga-lena.darkow@ebs.edu Dr. Elizabeth Montgomery +49 89 5790 5159 elizabeth.montgomery@de.pwc.com We would like to thank the panellists who took part in the Delphi survey that underpins this report. For condentiality reasons their names will not be mentioned. We would like to express our appreciation for the expertise provided by the below listed individuals: Cem Araci, Umit Baskirt, Martha Elena Gonzalez, Leonid Kostroma, Arun Joshi, Tony Lam, Henrique Luz, Chirantan Mandal, Akhter Moosa, Alan Ng, Bharti Gupta Ramola, Luciano Sampaio, Chris Siewierski, Alexander Sinyavsky, Cenk Ulu, Elizabeth Wong. For more information on the T&L 2030 series or a download of our three T&L 2030 publications, please visit www.tl2030.com. Welcome Is it even still possible to speak about ‘emerging’ markets in the logistics sector? Many large logistics service providers report that they already operate in more than 100 countries; the largest express companies list as many as 200 countries or more. And such wide-reaching networks are not a new development – on the contrary, global logistics are as old as global trade itself. Yesterday’s Silk Road has left traces in countless transport connections in the air and by sea, road or rail – and these too are long established. The rst express company to operate as a joint venture within China was set up 25 years ago. Today, the world famous refreshing soft drink is available throughout the world, without anyone seriously considering the possibility that insufcient logistics could throw a spanner in the works. It might almost be possible to believe that state of the art logistics services are uniformly available in all corners of the globe. Take a closer look, though, and signicant differences soon become apparent, together with the challenges that global logistics companies will need to face in coming years and decades. Emerging markets will clearly play a central role. But what will the T&L industry in these countries look like in twenty years? Will logistics’ centers of gravity shift eastward? Or southward? What new hubs and spokes will develop in global transportation networks? Who will be the leaders in the logistics industry in emerging markets – the state as owner of railroads and postal companies, ports and airports, airlines and shipping companies? Existing local private companies or new players? Or large multinational corporations from industrialised countries? Will the future belong exclusively to high-tech service offerings, or will simple, reliable services also play a role? Our third volume of Transportation & Logistics 2030 (T&L 2030) is dedicated to answering these and other questions. Nearly a hundred experts from all over the world took part in our Delphi Survey. We’ve analysed their views, together with professionals from our global PwC network. We’ve also taken a closer look at seven specic emerging markets: Brazil, China, India, Mexico, Russia, South Africa and Turkey. The report will certainly be of interest for readers from other regions of the world though. Who wouldn’t want to learn whether logistics companies from China and its peers will take over the logistics markets of North America and Europe in the foreseeable future? We hope you will consider T&L 2030 Vol. 3 food for thought and welcome your feedback. Klaus-Dieter Ruske Dr. Peter Kauschke Global Industry Leader Transportation & Logistics 2030 Transportation & Logistics Programme Director PricewaterhouseCoopers PricewaterhouseCoopers Foreword Western industrial, consuming and logistics countries will do much more business with the striving nations of emerging markets than today – and vice versa. Soon, a nice new world will open up unforeseen collaborations between the East and West, North and South. Thanks to the strong development of emerging markets, completely new logistics passageways will appear on our world map: passages between Asia and Africa, between Asia and South America and within Asia. The expected relative weight of the ow of goods between the continents will shift considerably. Logistics companies in developed markets have to be active in developing foresight in order to use the enormous potential of this trend. Hence, they can productively and cooperatively take advantage of the new trade corridors. He, who already has the landslide of the global logistical topography on his display, can take advantage of this megatrend at the right moment: namely now. Preparation is everything. The better the strategic market and corporate foresight, the safer and greater the subsequent success of logistics service providers and emerging countries. This study operates along these lines of strategic foresight. It gives an overview of the status of emerging markets, as far as what regulation and liberalisation concerns. It describes the new trade corridors, the new ows of goods, the predicted market development for individual logistics products and services and the progress of the competition. This study focuses on reporting from and out of emerging markets, rather than just about them. Half of the 90 study experts from 28 countries were born in emerging markets and provide their invaluable insider knowledge on the following pages. This knowledge is rened and illustrates country-specic examples in different country sections. The logistics explosion in the emerging markets will be immense, will elevate the international ows of goods to an unknown level, herald the globalisation programme 2.0 and unite the world under one roof, as seldom before in history. Gigantic quantities of goods will ow between Africa, Asia and South America with the support of North American and Western European means of transportation and logistics services. The world will grow together in a common team effort in a way which sociologists and utopians have only dreamed about. And logistics will be right in the middle of it all – but only if you begin to prepare for this wonderful team effort today. Dr. Heiko von der Gracht Director Center for Futures Studies and Knowledge Management Supply Chain Management Institute, EBS Business School 5PricewaterhouseCoopers Table of Contents Executive Summary 7 Findings of Delphi Survey 11 1 Regulation sets the scene for investment and growth 11 2 New transport corridors span the globe 16 3 Industry consolidation accelerates and service levels improve 20 4 Fierce competition at home and abroad 23 Seven routes to one goal: growth 28 1 Brazil 32 2 China 34 3 India 36 4 Mexico 38 5 Russia 40 6 South Africa 42 7 Turkey 44 Opportunities 47 Methodology 53 References 58 Contacts 61 Executive Summary 7PricewaterhouseCoopers As the importance of emerging markets continues to increase, what new hubs and spokes will develop in global logistics networks? Where are we likely to see the emergence of new industry leaders, and what strengths will they need to compete in a crowded global marketplace? Some of the answers can be found by looking at the globe – regions which are able to serve as an economical transit point have an inherent advantage in establishing logistics hubs. In our discussions of the T&L markets in Turkey, Russia and South Africa we look in detail at how each of these countries plans to capitalise on their geographical position, serving as a link between Asia and Europe or as an entry point to Africa. Demographics are also critical, and here the balance tips strongly towards Asia, notably to China, with the world’s largest population and India, with the world’s fastest growing populace. China currently holds a strong advantage, with signicantly superior infrastructure in place compared to India, and a respectable ranking of #27 on the World Bank’s Logistics Performance Index. Seven of the world’s twenty largest ports are located in China – and the trafc is not all directed towards North America or Western Europe. China is also Brazil’s largest trading partner and a signicant market for many of its emerging Asian neighbors like Malaysia and Indonesia. All of these countries provide sizeable quantities of raw materials to China, which has started trading with some of Africa’s least developed countries. While these countries are still economically poor, some are rich in natural resources. The establishment of the relevant trade corridors is already well underway in some cases; in other cases initial investments in infrastructure are just beginning. As a result of these developments, new trade corridors between Asia and Africa, Asia and South America and within Asia will re-chart global supply chains. Trade volumes will shift towards emerging markets and least developed countries will take their rst steps into the global marketplace. This is one of the key ndings of the 3 rd volume of our Transportation & Logistics 2030 series of publications. Our analysis of the T&L industry in emerging countries also takes a close look at regulation, industry consolidation and competition. Changing regulation will have a major impact One important step towards developed market structures can be seen in the move from state-owned enterprises to private companies. This trend is encouraged by the requirements of the International Monetary Fund and the World Bank. Both organisations require emerging markets to undergo structural adjustment, including privatisation, as a condition of receiving new loans. The emerging markets vary dramatically in the degree to which they have begun the transition to privatisation. Some have only seen very minimal privatisation activities, others have taken tentative rst steps and a few are well along the privatisation journey. China’s emergence as a global economic player has been accompanied by a major internal transformation. The economy has shifted from complete reliance on state-owned and collective enterprises to a mixed economy where private enterprise plays an important role and the number of state-owned enterprises has declined signicantly. Privatisation has helped spur China’s dramatic growth. New trade corridors between Asia and Africa, Asia and South America and within Asia will re-chart global supply chains. Trade volumes will shift towards emerging markets and least developed countries will take their rst steps into the global marketplace. 8 Transportation & Logistics 2030 Turkey has also launched an all-embracing privatisation programme. While the results of the country‘s rst wave of privatisation (1985-1998) were somewhat lackluster, the government has renewed its focus and established a number of goals for privatisation, including the provision of a legal and structural environment for free enterprise to operate and the transfer of privatisation revenues to major infrastructure projects. The T&L industry is receiving particular attention, with a number of projects already underway or in planning. Privatisation will continue to be critical in these and other emerging markets. In some of these the government‘s role will undergo a major shift, from active market player to watchdog. This oversight functionality will remain vital to ensure fair and sustainable competition, though. Emerging markets are evolving towards more transparency, so there will still be a strong need for governments to regulate and provide process assurance. The government may play an important role in a number of other ways as well. For many emerging markets, free trade zones will help spur economic growth and logistics services providers will need to adjust their service offerings to serve these trade hot spots. Changing CEP market offers bright spots The courier, express and parcel (CEP) market is one of the strongest growing sectors of the T&L industry in a number of emerging markets. It‘s also an area where changes in demographics and consumer behaviours could have the most signicant impact. Logistics providers with a service portfolio characterised by low-cost and low-service will have to improve the scope of services in order to maintain competitiveness. Turkey provides a good example. Changing consumer behaviours such as lower levels of reliance on the national post, growing e-commerce, urbanisation and a young population should drive signicant growth levels in CEP. The Turkish textile and clothing industry already relies heavily on international CEP services. As a result of these services, samples of ready-to-wear items and new designs can be delivered quickly to potential customers in Europe, avoiding delays in the race against competitors. This example shows some of the promise the CEP can hold for both domestic and foreign logistics service providers. However, to be successful in the long term, logistics service providers will need to observe changing customer needs carefully and provide the required products and services. Many paths lead to the emerging markets and M&A opportunities will abound Emerging countries have long been target markets of leading multinational logistics operators. Our research suggests that additional multinational logistics companies will have successfully entered the domestic logistics markets in emerging markets by 2030. This means that multinationals will not only operate in emerging markets for advantages in international trade, they will also engage and operate in the domestic logistics markets. The number of logistics service providers in BRIC countries already exceeds the tens of thousands mark. The spread ranges from one-man businesses to large companies with several thousand employees, with the resulting differences in competitiveness, nancial resources and offered services. The larger and nancially-better equipped logistics companies will target growth by looking for suitable mergers and acquisitions (M&A). Consolidation of the logistics markets in emerging countries will be the consequence and is also a natural part of the process of industry maturation. Perhaps more importantly, it is a necessary step towards achieving economies of scale in an industry which is as strongly fragmented as the logistics industry in emerging countries. In recent years a number of the pioneering joint ventures and other arrangements have led to acquisitions by major players. Our quarterly PwC M&A analyses suggest that consolidation activities have already been taking place during the past two Privatisation has already helped re up China's economic growth and other countries like Turkey are also looking to benet from increased efciency and better access to capital. 9PricewaterhouseCoopers years in a number of emerging markets and are on the rise. The relative interest in Asia and Oceania targets has grown signicantly compared with deals targeting entities in other regions. Emerging market logistics players won’t rule the world; nor will they need to PwC’s macroeconomics group anticipates ever-growing numbers of multinational companies entering the world stage from emerging markets. We also believe that many of these companies will look to grow their businesses in developed markets, rather than looking to other emerging markets. The picture for the T&L industry looks somewhat different, though. While China is already making serious inroads into the Fortune Global 500, only one transportation company, China Railways, makes the list. Emerging market players do not yet represent major players on the world stage in the T&L industry, unlike in other sectors such as consumer goods or electronics. Very few are looking beyond their own local markets, or at most those of other emerging markets (usually neighbours). This situation looks unlikely to change in the next twenty years. At the same time, there is good reason to argue that logistics companies need to look no further than their own domestic markets and those of their emerging neighbours to nd growth. After all, their markets are generally very far from saturated and growing at double-digit rates – a major contrast from the mature markets of the developed nations, where growth expectations generally hover around a much more modest 5%. Companies in emerging markets which focus on their home markets and actively search for opportunities to enlarge their logistics capabilities will maintain and improve their competitiveness, providing ample room for highly attractive growth. And while it looks unlikely that the T&L industry‘s centre of gravity will shift to emerging markets, leading local players will become increasingly important as partners and collaborators for multinationals from around the world. Future prospects The world’s supply networks are changing. New trade corridors are already becoming visible and those companies and countries able to capitalise on them will benet most from the evolution of global trade. As emerging markets continue to grow, there will be a host of opportunities for logistics service providers of all sizes. Some of these will stem from the sharing of a whole range of good practices that are commonly used in developed markets, but not yet fully implemented in many emerging markets. These include strategies for managing people, such as diversity management, managerial accounting systems including the use of KPIs, sharing lessons learned during past liberalisation processes and developing robust corporate social responsibility practices and reporting. Others may involve emerging markets providers who are able to act as advisors to those entering their marketplace, to help scout out suitable acquisition targets, as just one example. Most importantly, though, logistics companies will need to develop or ne-tune their own specic strategies for operating in diverse emerging markets. They will need to understand how government regulation in each market affects them, be it changing customs procedures, the establishment of free trade zones, incentives for foreign direct investment or new sustainability requirements. This may mean adapting their service portfolio not once, but many times, as demand patterns change and emerging markets develop. Note on methodology This study is based on a multifaceted analysis of the importance of emerging markets for the Transportation & Logistics industry. Our methodology draws upon a rigorous mix of desk research and the results of a Delphi survey among 90 selected subject matter experts from 28 countries around the world. Nearly half (49%) of the survey participants were from emerging countries. We also drew strongly upon the knowledge and experience of PwC’s own T&L leaders in seven key emerging markets. Emerging market logistics players are unlikely to dominate developed markets; instead they will build competencies and market share in more attractive home and emerging markets. Findings of Delphi Survey [...]... demanding in terms of quality and price While logistics service providers in emerging markets frequently have limited their range of products to basic services like conventional 22 Transportation & Logistics 2030 Our expert panel sees logistics companies as up to the challenges posed by offering value-added services They evaluated the projection that by 2030 Logistics service providers in emerging markets... 182.4bn • Urbanisation 2009 85.4 % • Size of logistics market ('10) US$ 150bn • Logistics Performance Index 3.20 (#41) 28 Transportation & Logistics 2030 Russia • GDP 2009 US$ 1,254.7bn • GDP per capita 2009 US$ 8,873.6 • Merchandise export 2008 US$ 471.6bn • Merchandise import 2008 US$ 291.9bn • Urbanisation 2009 73.1 % • Size of logistics market ('09) US$ 49bn • Logistics Performance Index 2.61 (#94) Turkey... value-added services to existing clients “The Chinese logistics challenge of the future is to sustainably develop the emerging logistics hubs in the Western upcountry and to successfully connect them to foreign investments and market growth.” Alan Ng China Industry Leader Transportation & Logistics PricewaterhouseCoopers 34 Transportation & Logistics 2030 To date, 400 out of the world’s 500 biggest companies... New York / New Jersey 0 5 10 15 in million TEU Source: Institute of Shipping Economics and Logistics5 9 24 Transportation & Logistics 2030 20 25 30 35 Logistics service providers from developed countries will heavily engage in emerging markets However, emerging markets will not become the new centres of gravity in logistics as regards standard setting, innovation and technology transfer The so-called Westline... to enhance their service level and logistics capabilities 26 Transportation & Logistics 2030 Seven routes to one goal: growth Seven routes to one goal: growth Mexico • GDP 2009 US$ 866.3bn • GDP per capita 2009 US$ 8,040 • Merchandise export 2008 US$ 291.7bn • Merchandise import 2008 US$ 323.2bn • Urbanisation 2009 77.5 % • Size of logistics market ('03) US$ 50bn • Logistics Performance Index 3.05 (#50)... restricted to ocean travel; air freight connections have also shifted towards emerging markets such as CIS and Asia.28 18 Transportation & Logistics 2030 Our Delphi experts are well aware of such trends They evaluated the thesis 2030: Global trade flows have shifted such that new transportation corridors between emerging countries and least developed countries have been established”, as highly probable... Delphi panel to assess the projection that by 2030 Logistics service providers from emerging countries have gained significant market share in developed countries” The panel experts do not believe that the logistics industry in developed countries will be target for logistics service providers from emerging markets Given that the emerging countries’ own local logistics markets exhibit much higher growth... adapt their businesses models 20 Transportation & Logistics 2030 and organisations to domestic market players and other stakeholders, such as the government Partnerships, collaborations or joint ventures with domestic logistics companies are seen as one way to approach regional requirements In China, for example, UPS, TNT, Fedex and DHL have chosen to cooperate with domestic logistics companies in order... freight forwarder ABX Logistics also created a joint venture with Penske Logistics in Brazil in 2007 The resulting company, ABX-Penske Air & Sea is positioned to serve the growing maturity of Latin American markets and the demand for complementary logistics expertise.39 Logistics service providers who follow the device ‘share & collaborate’ will benefit regardless of being a domestic logistics service... markets.” Ye Weilong Managing Director COSCO Logistics Company Ltd More multinational logistics companies will have successfully entered the domestic logistics market in emerging markets by 2030 This means that multinationals will not only operate in emerging markets for advantages in international trade, they will also engage and operate in the domestic logistics market in emerging countries We asked . industry leaders? Transportation & Logistics Transportation & Logistics 2030 Acknowledgements The editorial board of this issue of our Transportation & Logistics 2030 series consisted. Leader Transportation & Logistics 2030 Transportation & Logistics Programme Director PricewaterhouseCoopers PricewaterhouseCoopers Foreword Western industrial, consuming and logistics. or will simple, reliable services also play a role? Our third volume of Transportation & Logistics 2030 (T&L 2030) is dedicated to answering these and other questions. Nearly a hundred